The cold air blowing through our country could very well be from the worried sighs of anxious equity investors. While once uneasy during the depths of the global financial crisis, now investors fret that markets have bounced back too far, too fast. In part, they are forgetting how far we fell and how cheap markets were two years ago. The bigger picture, however, is that the concerns over record levels in the U.S. ignore the pockets of opportunity within the country and the appeal of non-U.S. markets.
To be sure, at 15 times next year’s estimated earnings, the S&P 500 multiple has expanded from two years ago when great doubt remained about the global economy. We wrote then that the implied growth rate was low and the implied risk premium was too high.
We have calmed down since. As we discussed last quarter, perhaps risk perception is too low now, and investors are too complacent. An increase in volatility may occur, but we believe growth remains and more risk won’t alter the long-term market path.
Inside our 1Q 2014 Global Sector report, you can read about the sources of growth, sector by sector and across countries. For example, the shift to mobile computing is opening up areas in communications. Health care innovation and stepped-up FDA approvals mean a wave of drug launches with the promise of better and more effective treatments for some of the world’s most threatening diseases. Europe is recovering, while companies there drive profit growth through corporate restructurings. In China, the economy is slowing, we think, but we are encouraged about the pace and trajectory of reform. The technology sector sees opportunity in a broader trend called the “Internet of Things.” Japan won’t be a straight-line improvement but is moving in the right direction.
We think these pockets of growth and others we have found are investment opportunities. It will be a good environment for companies in the right positions.
We think that with rates low, even if the yield curve steepens with tapering, the broad valuation for equities is not extreme. P/E multiples are always foggy lenses to use to evaluate a market, but the view is especially obscured this time around. We see data that shows a clustering on multiples within sectors, meaning investors are not distinguishing between the growth prospects of companies. The trends we highlight within this document will help some companies grow but bring challenges to others. Mobile shopping pressures mall-based retailers; biotech innovation is wonderful but a generic wave will pressure some big pharmaceutical companies; China’s restructuring hurts industries with excess capacity; and on and on. It drives the need to be a stock picker.
New records also bring out old arguments. Market bears point to CAPE — cyclically adjusted P/Es — as a sign of an overheated U.S. market. Briefly, the measure tries to smooth economic cycles by looking at a 10-year earnings path. We think it ignores a low-rate and low-inflation environment, a shift to lower-tax non-U.S. profits and the fact that the last 10 years, as we all know, was hardly a typical economic cycle. It’s a fair debate, however, but it misses the bigger point: There are opportunities at the individual stock level.
For a more comprehensive view of the U.S. and global economies sector by sector, please read Janus’ 1Q Global Sector View Report “Be Selective.”
Please consider the charges, risks, expenses and investment objectives carefully before investing. For a prospectus or, if available, a summary prospectus containing this and other information, please call Janus at 877.33JANUS (52687) or download the file from janus.com/info. Read it carefully before investing or sending money.
Mutual fund investing involves market risk. Investment return and fund share value will fluctuate and it is possible to lose money by investing.
The opinions are those of the authors as of January 2014 and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.
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